Oct 3 (Reuters) - U.S. stocks turned positive in choppy trading on Thursday as U.S. services sector activity slowed to a three-year low, raising expectations of another interest rate cut by the Federal Reserve to stem a wider economic downturn.

Wall Street's main indexes dropped about 1% after the ISM's non-manufacturing activity index for September fell to 52.6 from 56.4 the month before and below expectations of 55.0. Still, a reading above 50 denoted an expansion in the sector.

But the indexes were back in the positive territory as bets of a Fed rate cut in October jumped to 92.5% from 39.6% on Monday, according to CME Group's Fed Watch tool. The Fed's next policy meeting will be held at the end of the month.

"The degradation of the data, especially the non-manufacturing data, kind of pushes that to the Fed doing another cut," said Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh.

"This is very familiar to the post-2008 world where we get bad news and the market rallies because we are anticipating a rate cut."

Market participants now await a pivotal jobs report on Friday after dismal manufacturing and hiring data triggered two days of sharp losses, with the indexes recording their deepest one-day percentage slide in six weeks on Wednesday.

PepsiCo Inc rose 4.1% after the company beat quarterly expectations as higher advertising and new low-calorie versions of Gatorade boosted demand for its beverages in North America.

Its shares propped up the consumer staples sector by 0.75%. Nine of the 11 major sectors were higher.

The benchmark index is now 4.5% below its all-time high hit in July even though it came within striking distance of that level two weeks ago.

At 11:17 a.m. ET, the Dow Jones Industrial Average was up 19.02 points, or 0.07%, at 26,097.64, the S&P 500 was up 9.86 points, or 0.34%, at 2,897.47. The Nasdaq Composite was up 40.45 points, or 0.52%, at 7,825.70.

Leading the decliners on the S&P 500 was Corona maker Constellation Brands Inc, which fell about 6% as it took a $839 million mark down in the value of its investment in pot firm Canopy Growth during the quarter.

Advancing issues outnumbered decliners by a 1.13-to-1 ratio on the NYSE and a 1.12-to-1 ratio on the Nasdaq.

The S&P index recorded nine new 52-week highs and 20 new lows, while the Nasdaq recorded two new highs and 82 new lows.

Reporting by Medha Singh and Arjun Panchadar in Bengaluru;
Editing by Arun Koyyur